Financial instruments, such as stocks or bonds, are commonly traded on public and private markets or exchanges (referred to collectively herein as “markets”). A financial instrument may be said to have a “behavior” defined by various pieces of information relating to the trading of the instrument such as the price of the instrument, the volume or number of shares of the instrument traded in a trading session (i.e. the volume) and the number of individual transactions for the instrument during the trading session. In some cases, aberrant behavior may be related to the availability of new information relating to the business organization underlying the stock.
Investors have long sought methods of predicting or anticipating changes in the price of a financial instrument, such as a stock or bond, by attempting to detect changes and trends in the past behavior of the instrument. Many methods have been proposed for doing so.
Many of these methods rely on a statistical analysis of the instruments price over a selected prior period of time. Typically, such methods examine the average and standard deviation of the stock price. Methods which rely on price information only are unable to detect changes in the perception of an instrument which do not have substantial effect on its price. For example, if the volume of trading in a stock increases dramatically for a short period (i.e. a trading session or a part of a session), the price may not be substantially affected. However, investors may still wish to be alerted to the increase in volume, which may be related to an increase in demand or supply of the stock on the market and which may important for some investors in selecting their own transactions.
Similarly, methods which rely on a single selected time period may not be able to detect aberrant behavior which might have been identified if a different time period had been used. For example, some aberrations in a stock's price will seem large compared to the standard deviation of the stock's price over the last few days but may appear relatively small in comparison to the standard deviation of the stock's price over an extended period such as two years. Such an aberration will not be detected by a method which utilizes only data collected over a two year period. Other aberrations may be more easily detected when a shorter time period is used. For example, if a stock typically has a very steady price, but has recently experienced a volatile period, then the use of a short recent time period may not identify an aberrant change in the stock's behavior
In many cases, an instrument is traded in more than one market. Methods which rely on information from only one market will fail to identify aberrant behavior which occurs on another market where that same instrument is traded. This may happen, for example, where a small group of investors, all of whom trade on one market learn some information relating to an instrument. These investors may enter into transactions which lead to aberrant behavior of the instrument. Such aberrant behavior will not be detected if information from that market is not considered by the method.
Variations in the behavior of an instrument may be related to overall changes in the market or exchange on which the instrument is traded. As a result, methods which consider only the behavior of the instrument and ignore the overall behavior of the underlying market may identify an instrument as having aberrant behavior when in fact the instrument's behavior was entirely in keeping with overall changes in the market.
Accordingly, there is a need for a method for detecting aberrant behavior of a financial instrument which takes into account multiple factors relating to the instrument over varied time periods. Where the instrument is traded on multiple markets, the method will preferably also take into account the behavior of the instrument on at least some, or more preferably, on all of those markets. The method will preferably also consider the behavior of the instrument in the context of the overall market or markets on which the instrument is traded.